Higher Tax Payments Help Push MCI Loss to $32 Million

By KEN BELSON

Published: February 26, 2005

MCI, the subject of a bidding war, released an earnings report yesterday that gave the outside world a glimpse of what its suitors, Qwest Communications and Verizon Communications, are fighting for.

MCI said it lost $32 million, or 10 cents a share, in the fourth quarter last year, compared with a profit of $22.2 billion in the last quarter of 2003. The loss, which was mostly a result of higher tax payments, was far less than the $3.4 billion MCI lost in the third quarter of 2004.

While MCI's finances have largely stabilized, the report raised some questions about why it has become the latest belle of the rapidly consolidating telecommunications industry. Revenue fell 10 percent, to $5 billion, in the fourth quarter from the same period in 2003, largely due to declines in MCI's consumer division. For all of 2004, revenue dropped 15 percent, to $20.7 billion.

MCI, which is based in Ashburn, Va., expects revenue to fall another 10 percent to 14 percent this year, or $18 billion to $19 billion. The company said the declines were mostly due to its reduced presence in the consumer market. The company also budgeted $1 billion for capital expenditures, about what it spent last year.

Michael Capellas, the chief executive, reiterated his support for MCI's agreement to sell itself to Verizon for $6.75 billion. Mr. Capellas, speaking to investors on a conference call, said, ''We will do our utmost to drive that through.''

He added that MCI's board members ''will honor our fiduciary responsibility'' to study a revised bid from Qwest, which on Thursday offered $8 billion in cash and stock for MCI.

MCI shareholders have pressed Mr. Capellas to take a good look at Qwest's offer, particularly since Verizon's shares have declined in the nearly two weeks since it agreed to buy MCI, reducing the value of its offer.

MCI's shares slipped 21 cents, to $22.60 yesterday, mostly on disappointment that Qwest did not do more to sweeten its revised bid. Still, MCI's shares are above the $20.42 that Verizon offered.

The fight between Qwest and Verizon overshadowed some of the fundamental problems facing MCI. With the company retreating from the consumer market, it has become far more reliant on revenue from corporate clients. Sales to the nation's largest companies appear to have stabilized, rising 1 percent in the fourth quarter compared with the period from July to September.

But MCI's primary business -- transporting data and voice calls over long distances -- is fast becoming a commodity. The company has been investing in new technology to automate more of its network to help reduce costs. But savings from those efforts will take time to accrue.

Other efforts to cut costs are more problematic. MCI now employs 40,000 workers, or about half of what it had at its peak. Finding other jobs to cut will be more difficult.

On the positive side, MCI said it had $5.5 billion in cash and marketable securities at the end of the fourth quarter.